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China crash a sign of nation’s transition to a new economy

By Debora MacKenzie

Tumbling stocks(Image: Xie Zhengyi/Imaginechina/Corbis)

It’s just growing pains. China’s stock market has plunged by more than 15 per cent in the first two days of this week, and others around the world have fallen with it. Aside from stirring memories of 2007, it seemed a bad omen for crucial climate negotiations in Paris in December.

China’s historic agreement to rein in its greenhouse emissions by 2030 is central to success there, so could financial crisis put its environmental concerns on hold?

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On the contrary, say observers: the week’s events reflect what made the 2030 pledge possible. “This round of economic slowdown is part of China’s effort to rebalance its economy to a less energy- and CO2-intensive one,” says Li Shuo of Greenpeace China.

The country became prosperous, and the world’s largest CO2 source, by investing in manufacturing and electric power. But to keep boosting prosperity – especially for 300 million discontented urban migrants who missed out – China, like all rich countries, must shift to an economy governed by consumer spending, innovation and service industries. That means less CO2. China’s decision in 2013 to make that transition by 2022 led to its emissions pledge in 2014. So that is unlikely to change now, says Li.

In fact, this week’s crash was mainly a speculative bubble bursting, say China watchers. But in line with the country’s economic changes, manufacturing, coal and oil were the worst-hit sectors – continuing a long-term decline – whereas service industries are fine.

Route to growth

“China sees diversifying away from heavy industry and toward clean-energy sources as key to future economic growth,” says Fergus Green of the London School of Economics. “That won’t change just because of some short-term financial market woes.”

Instead of abandoning pledges to cut CO2 emissions at the first sign of economic trouble, under China’s new growth model, less CO2 points the way out of it.

And rather than climate, this week’s financial turmoil could point to another global problem: continuing instabilities in the closely coupled world financial system that propagated the 2007 crash. More evidence emerged last month that market crashes self-organise when investors overreact, copying each other rather than responding to outside information. This week’s events were a reminder of how easily such actions can spread.

China’s economic evolution will continue to affect financial markets as its one-party system tries to curb reluctant industries vested in the old economy. The fact that global markets remain closely connected could become the real problem.